Effect of Promotional Activities on Substitution Pattern and Market ...

Journal of Food Distribution Research Volume 43, Issue 1

Effect of Promotional Activities on Substitution Pattern and Market Share for Aquaculture Products Benaissa Chidmia, Terry Hansonb, and Giap Nguyenc a

Assistant Professor, Department of Agricultural and Applied Economics, Texas Tech University, 2500 Broadway, Lubbock, Texas, 79401.USA. Email: [email protected]

b

Associate Professor, Department of Fisheries and Allied Aquacultures, Auburn University, 203 Swingle Hall, Auburn, Alabama, 36849.USA. Email: [email protected] c

Research Fellow, Department of Agricultural Economics and Rural Sociology, 202 Comer Hall, Auburn University, Auburn, Alabama, 36849.USA. Email:[email protected]

Abstract We estimate the effect of the supermarket chains promotional activities on the substitution pattern and market share of different aquaculture products. The result show negative effects of ownprice elasticities on its product’s market shares. Cross-price elasticities have small positive effects on other seafood products’ market share. Promotional activities positively affect market share of the product; and these effects do behave differently for different seafood products and diminishes with increasing amount of product promoted. Promotional activities also have an effect on price and reduced the consumer price sensitivity. Keywords: Promotion, substitution, market share, and seafood

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Chidmi, Hanson, and Nguyen

Journal of Food Distribution Research

Introduction The increase in the concentration ratio in the supermarket industry has made supermarket chains an important player in food distribution. Rather than being neutral pass-through between the manufacturers and the consumers, supermarket chains provide many relevant services to consumers, such as one-stop shopping convenience, in-store banking, and additional services such as professional pharmacists. Additionally, supermarket chains can also intervene in setting the final retail prices through promotional activities. While the literature on the impact of advertising on sales and the degree of competition between firms is abundant, there is a lack of understanding and analysis of the impact of supermarket chains promotions on the sales and the intensity of competition between different brands and product categories. The objective of this paper is to estimate the effect of the supermarket chains promotional activities on the substitution pattern and market share of different aquaculture products. This is relevant to food distribution in at least two aspects. First, accurate measures of substitution patterns between different competing products are crucial for the pricing, and promotion decision making. Ignoring the effect of promotional activities on the price elasticity may produce biased estimates and therefore inaccurate forecasts. Second, promotional activities can affect product market share either directly or indirectly through the price effect. For food distribution managers, it is imperative to estimate both effects.

The Model Consumers maximize their utility by choosing the product/brand that maximizes their utility given by: (1) U j

j

pj

Aj

A 2j

p j Aj

j

j 1,...,J

,

,

Where p j is the retail price for product j , A j is the promotional activity for the product j , A 2j is the square of the promotional activities included to control for the diminishing return of the promotion activities.1 j is a random shock. In our context, the promotion variable is defined as the percentage of the volume sales under different type of merchandizing (price reduction, displays, and features). Notice that the interaction between the price and promotional activity will allow us to decompose the price elasticity and the promotion elasticity in two components: a direct component and an indirect component. Further assume that j are independent and identically distributed with a type I extreme value distribution, i.e., f ( ) e e . Then the market shares for the j th product (corresponding to the probability that the j th product is chosen) is given by the following equation:

1

A high level of promotional activities might send a negative signal to consumers about the quality of the product. As the quality goes down, the promotional activities are increased to help sell the product. March 2012

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exp(

(2) s j

J

1

pj

j

exp(

pk

k

A 2j

Aj Ak

p j * Aj ) Ak2

p k * Ak )

k 1

Equation (2) corresponds to the multinomial logit. This model presents the advantage of being simple to implement. The estimation proceeds by the inversion proposed by Berry Levinsohn, and Pakes (1995). For the logit model the inversion is given by: (3) ln( s j ) ln( s 0 )

j

pj

Aj

A 2j

p j * Aj

Where s 0 is the market share of the outside good, obtained by subtracting the sum of observed market shares of all the inside brands from 1. Note that the logit model is transformed to a simple linear regression where the natural logarithm of the ratio between the observed market shares of the brands in the set choice with respect to outside good is regressed on product characteristics and the price variables. The price elasticity of market shares given by equation (3) reduce to: (4)

sj jk

pk

A j ) p j (1 s j )

( (

A j ) pk sk

for j

k

otherwise

To the extent that the market share depends on the interaction between the retail prices and the promotional activities, the price elasticity will depend on the scope of promotional activities. An important feature of the above model is that it allows the retailer/processor to analyze how consumer’s price sensitivity (elasticity) is affected by the promotional activities. Notice that the ratio of the logit market shares for any two brands j and l does not depend on any brands other than j and l. That is, the relative odds of market shares of brand j over brand l are the same no matter what other brands are available or what the characteristics of the other brands are. In the logit case the ratio exhibits what is called independent from irrelevant alternatives, or IIA (McFadden 1981; Train 2003).

Data The above model is estimated using logit regression on weekly scanner data on aquaculture products for different categories of entrée, breaded, and unbreaded fish and seafood products. This paper used A.C. Nielsen scanner data consisting of US weekly data on consumer purchases (and company sales) quantity and value of catfish, crawfish, clam, shrimp, tilapia, and salmon products from 52 US cities for the June 2008 to June 2010 period. Table 1 (see Appendix) provides the descriptive statistics of the variables used in this estimation.

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Results and Discussion Table 2 presents the results of the estimation of equation (3) with and without the interaction between the retail prices and the promotional activities. Table 2: Parameter Estimates Variable Price*Promotion included Price Promotion Promotion squared Price*Promotion

Estimate -6.0483 1.3407 -3.5332 1.3763

t-Statistic -37.7707 1.5542 -2.5111 2.7529

As expected, the parameter estimate of the variable price is negative and statistically significant. This implies that as the price increases, consumers’ utility decreases. For the promotional activities, this variable has a positive effect on consumers’ utility, though this effect is not statistically significant. For the variable promotion squared, the estimate is negative, implying some “diminishing return” of the promotional activities on consumers’ utility. This implies that the level of promotional activities has some optimal level where it reaches the highest effect on consumers’ persuasion. However, this is not the scope of this paper. The variable price*promotion has a positive and statistically significant parameter. Given that the elasticity is proportional to this estimate and the estimate of the variable price, the resulting magnitude of the price elasticity will be reduced by (-6.0483+ 1.3763* promotion). Turning now to the price elasticity, we use equation (4) to compute the matrix of elasticity’s. Due to the high dimension of this matrix (19*19=361 elasticity’s), we discuss only the ownprice elasticity in detail. On Average, the cross-price elasticity is positive and of small magnitude compared to the own-price elasticity. The elasticity ranges from 0.00007 to 0.3382 with an averageof0.02895andastandarddeviationof0.001691. For the own-price elasticity, Table 3 summarizes the findings with and without the interaction between price and promotion. For catfish, tilapia, and salmon, the entrée products are more elastic than the breaded and unbreaded product forms. For shrimp products, the canned product form is the most elastic; while the entrée form is the least elastic. When the interaction is included, the average own-price is -6.4791, with a standard deviation of 2.5592, a minimum of -12.9211 and a maximum of -3.2333.

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Table 3: Own-Price Elasticity with and without Price-Promotion Interaction Product With Price-Promotion Without Price-Promotion Interaction Interaction Estimate t-Statistic Estimate t-Statistic Catfish Entrée -5.7762 -5.2306 -5.9038 -5.6207 Breaded -3.2333 -7.8160 -3.3344 -8.5817 Unbreaded -3.8159 -10.9021 -4.2080 -13.0490 Crawfish Entrée -4.5168 -7.5411 -4.6824 -8.3377 Unbreaded -10.5304 -11.8229 -11.3220 -14.4460 Clams Entrée -4.6801 -10.8540 -5.0733 -15.3280 Breaded -9.2243 -13.3664 -10.0090 -17.8620 Unbreaded -4.6703 -1.9484 -4.8752 -1.9940 Canned -4.9547 -14.2117 -5.3410 -18.8190 Shrimp Entrée -5.5013 -10.6175 -6.2445 -10.8920 Breaded -7.3735 -15.6008 -8.2526 -23.9180 Unbreaded -6.8725 -11.9619 -7.9778 -11.6720 Canned -12.9211 -29.3060 -13.7060 -39.0940 Tilapia Entrée -9.3159 -12.8064 -10.5300 -15.5310 Breaded -6.8721 -10.7345 -7.7572 -13.5730 Unbreaded -4.2538 -7.8549 -4.8916 -8.7867 Salmon Entrée -7.2591 -8.3123 -8.3912 -9.3915 Canned -4.1416 -8.4289 -4.4992 -9.8691 Unbreaded -7.1899 -14.0431 -8.0585 -18.0770 When the price-promotion is not included, the own-price elasticity ranges from -13.7060 to -3.3344, with an average of -7.1083 and a standard deviation of 2.8003. Notice that the ownprice elasticity decreases in magnitude when the price-promotion is included. This shows that promotion plays an important role in reducing the consumers’ price sensitivity. This is good as consumers will continue to buy the good with a price change and products will therefore need to compete on other levels, such as quality, brand, etc.

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Figure1: Relationship between own-price elasticity and promotion for unbreaded catfish

Figure 2: Relationship between own-price elasticity and promotion for unbreaded shrimp

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Figure 3: Relationship between own-price elasticity and promotion for unbreaded tilapia

Figure 4: Relationship between own-price elasticity and promotion for breaded tilapia

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Acknowledgements This study was funded in part by the Southern Regional Aquaculture Center.

Conclusions All own price elasticities have negative effects on its product’s market shares. When product price increases there will be a decrease in market share. Cross-price elasticity had a small positive effect on other seafood products’ market share. Promotional activities had a positive effect on market share of the product, though this effect does behave differently for different seafood products and diminishes with increasing amount of product promoted. Promotional activities also had an effect on price and reduced the consumer price sensitivity.

References Berry, S., J. Levinsohn and A. Pakes. 1995. “Automobile Prices in Market Equilibrium.” Econometrica 63(4): 841-890. McFadden, D. and C.F. Manski. 1981. Structural Analysis of Discrete Data with Econometric Applications. Manski (eds.). MIT Press: Cambridge, MA. Train, K. 2003.Discrete Choice with Simulations. Cambridge University Press: Cambridge, MA.

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Appendix 1. Table 1: Descriptive Statistics Variable Catfish Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Breaded Catfish Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Catfish Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Crawfish Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Crawfish Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Clams Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Breaded Clams Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Clams Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Canned Clams Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%)

Mean

StdDev

Minimum

Maximum

3265.64 772.74 4.4209 10.41

1247.10 385.76 0.7891 18.20

554.41 119.00 2.0597 0.00

6538.50 2465.00 5.7657 90.62

36874.17 14940.90 2.4975 13.97

12812.17 5767.45 0.2919 16.37

16863.66 7211.00 1.3663 0.42

83594.19 50676.00 3.2025 84.71

395600.90 124362.47 3.1578 41.32

153660.92 44947.56 0.2434 11.91

151959.33 47795.00 2.3840 14.37

820177.59 242443.00 3.5300 73.45

37518.25 10993.71 3.5068 16.13

6598.65 2986.01 0.4218 10.17

24935.51 5988.00 2.3343 1.63

60385.69 20134.00 4.5230 51.45

228848.72 26944.02 8.4821 30.99

67600.92 7461.70 0.5892 14.43

134831.45 16112.00 6.8082 5.26

484959.05 50707.00 9.7494 71.15

217337.99 57776.88 3.8027 34.73

56218.17 17379.03 0.2483 14.79

144052.78 36666.00 2.1723 8.81

490481.08 145849.00 4.1314 73.94

73693.20 9882.69 7.4962 34.84

15570.61 2329.37 0.4209 10.70

49822.26 6295.00 6.1273 8.98

126608.97 18767.00 8.3348 64.94

41829.79 19341.38 3.6513 22.09

17209.22 21769.09 1.8366 16.15

24373.88 4535.00 0.4882 2.92

155704.76 120991.00 6.3589 83.94

748594.13 187611.10 4.0124 32.07

216746.49 57001.64 0.2125 11.16

521403.96 127787.00 3.5068 10.09

1701660.27 423410.00 4.3614 58.65

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Table 1: Continued Variable Shrimp Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Breaded Shrimp Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Canned Shrimp Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Shrimp Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Tilapia Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Breaded Tilapia Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Tilapia Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Salmon Entrée Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Canned Salmon Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%) Unbreaded Salmon Dollar Sales Quantity (lb.) Price ($/lb.) Promotion (%)

Mean

StdDev

Minimum

Maximum

1658542.78 357354.46 4.7047 52.28

296159.83 80208.81 0.4290 8.12

1030538.66 196804.00 3.8277 37.28

2635499.56 660580.00 5.8347 73.01

1737769.62 282462.89 6.2097 47.17

465353.12 86988.25 0.2537 9.67

1154046.61 174620.00 5.4396 30.51

3662179.02 643517.00 6.7073 73.86

348500.53 34041.47 10.2693 25.22

128062.91 12827.80 0.2628 6.68

224641.32 20971.00 9.5027 14.53

989443.78 96066.00 11.0001 44.00

16963070.31

4453172.71

12048436.55

40494060.33

2726423.92 6.2679 60.70

745255.21 0.5129 5.16

1866766.00 3.7634 33.67

6967594.00 7.0444 72.90

399219.29 50641.43 7.8918 50.91

192956.29 25120.12 0.5096 9.91

109941.59 14249.00 6.2957 20.70

1031555.53 142684.00 9.2545 77.27

228840.42 40163.18 5.8126 50.60

77358.83 16527.30 0.4286 12.80

124047.26 20225.00 4.4900 17.72

545061.86 114221.00 6.6071 84.35

2138386.72 582099.35 3.6999 57.78

713954.37 195132.31 0.4196 10.17

997615.15 223069.00 2.8805 31.08

4931757.54 1418501.00 4.4851 78.42

840489.46 136197.60 6.2980 59.78

154220.74 35322.15 0.6701 9.54

459036.06 62944.00 4.3385 34.08

1332894.82 307225.00 7.8217 86.30

2502279.50 745264.30 3.4124 35.64

341588.21 156982.81 0.3401 9.76

1793250.67 449523.00 2.5542 19.29

3581701.09 1354943.00 4.0019 68.46

1318176.58 220443.39 6.0572 47.66

331819.69 65316.51 0.3306 8.55

728207.03 104095.00 5.0735 28.25

2259141.96 420415.00 7.4389 69.28

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